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  • Writer's pictureSam Fiduciary

12 Tips For Creating The Perfect 401k Plan

Building a great 401(k) plan for your company is a key component of running a successful business. Not only do great retirement plans help attract and retain employees… Flawed retirement plans can actually get you in trouble with the Department of Labor in some cases!

How can you be sure that your 401(k) plan is a strong one? Here are some things you should look out for when creating your 401(k) plan.

#1 Service Provider Fit

Not all service providers are created equally. The right provider for your company is going to depend on factors such as the type of plan you are looking for as well as the size of the plan.

If you aren’t sure what to look for in a retirement plan, consider reaching out to a consultant who has expertise in selecting plans. They will know what you should search for, and they will be able to help guide you through the process.

#2 Accurate Benchmarking

It is important that you use independent tools when analyzing a potential retirement plan. Tools created by the service provider typically are developed in order to make purchasing their plans as attractive as possible.

When benchmarking plans, it is essential to look at the rate of return. Compare each plan’s rate of return against similar plans. Hiring an independent fiduciary who has access to objective benchmark tools is a great way to achieve this.

#3 You Need To Be Prudent With Every Decision

At the end of the day, you will be held responsible for every decision you make when putting together your 401(k) plan. Make sure you can clearly communicate your reasoning behind each decision. Bringing an expert into the process can help demonstrate your prudence. If you decide to go it alone, make sure you do adequate research and are able to justify each decision you make.

Remember to document your justification for each decision you make in the process. It is much easier to articulate your reasoning behind a decision directly after making it, rather than trying to explain the justification down the road.

#4 Diversify

Diversification is the golden rule of investment. Funds that lack diversity are going to be less stable and more vulnerable. Every investment option you offer should have a high level of diversification. It is especially important to avoid fund overlap. For example, if you invested in an S&P 500 Index Fund and FAANG Stocks, your investment would have a significant amount of fund overlap. Diversification is one of the many things a fiduciary can help you with when planning out your 401(k) offerings.

#5 Beware of Proprietary Date Funds

Often times these kinds of funds will charge excessive fees. When service providers promote mutual funds from their own fund family, that is typically a red flag. These high fees do not reflect any added value, and therefore should be avoided.

#6 Analyze Fund Fees & Admin Fees

You want to make sure that participants aren’t paying unnecessary or excessive fees. You should be regularly analyzing the fund fees to see if there are alternatives that might help save participants money. Don’t forget to independently analyze the admin fees as well! Choosing plans with excessive fund fees and admin fees are often where companies get in trouble for breaching fiduciary duty.

#9 Look For a High Participation Rate

Looking at a plan’s participation rate is one of the strongest indicators of the plan’s attractiveness. The higher the participation rate, the more attractive a plan is to participants.

#10 Look For a High Level of Participate Contribution

People will contribute more to plans they find attractive. Look at the average amount employees contribute to the 401(k) plan. The higher the average, the more attractive and secure the plan seems to employees.

#11 Beware of Conflict of Interest

Creating a retirement plan that somehow benefits the company is an easy way to get yourself into hot water. You need to make sure that the 401(k) investment plan does not include any conflicts of interest. That means that your company should not generate profit in any way from employees contributing to the retirement plan.

Hiring a fiduciary can be a good way to prevent conflict of interest. Fiduciaries have the knowledge necessary to spot potential conflicts of interest that you might not be aware of. Additionally, a financial advisor that has a fiduciary duty to you is obligated to put your interests above their own. This can assure you that they are not operating from a conflict of interest.

#12 Document Everything!

Proper documentation of every decision can help protect you from liability down the line. You can never have too much documentation of the decision-making process when creating a 401(k) plan!

Getting a third party, such as a fiduciary, involved in the process can help immensely with documentation. They can help guide you through the process and do documentation on their end to help create a record of the decision-making process. Every email and meeting agenda could potentially help reduce liability. Make sure to organize your documentation as you go along, just in case you are ever called upon to justify your decision-making process.

#13 Hire An Expert

The best way to limit your liability and ensure the quality of your 401(k) plan is to hire an expert to help guide the process. This is where I step in! As an independent fiduciary, I help you analyze and independently benchmark your options. Depending on the service you choose, I can help with decision-making and even take on the liability associated with choosing a 401(k) plan.

Even if you aren’t sure if you could benefit from my services, it is always worth exploring your options. My first consultation is completely free so that you can decide if my services are a good fit for you. Book an appointment today via Calendly to learn more about how I can help with this essential decision-making process!


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